a. Ordinary Bond Trading System i. Bonds Eligible for Trading
All bonds listed on the KRX, such as government bonds, municipal bonds, specific laws bonds, convertible bonds (CB), bonds with warrants (BW), exchangeable bonds (EB), corporate bonds, etc. are eligible for trading.
ii. Trading Hours
Trading hours are from 9:00 a.m. to 3:00 p.m. every day except holidays and Saturday.
iii. Offer Price
Price quotations are accepted and the time for receiving quotation is from 8:00 a.m.
to 3:00 p.m. Quotation price, quotation quantity, and trading units are classified in Table 3.2 as per equity-linked bond, general bond, and foreign currency bond. There is no price change limit.
Table 3.2 Classification of Quotation Price, Quantity, and Trading Units
Classification Equity-linked bond General Bond Foreign currency bond
Quotation price unit W1 W1 1 point
Quotation quantity unit Face value W10,000
Face value W10,000
10,000 point Trading unit Amount of bond note
(min. face value W100,000)
Face value W100,000
(small-lot/retail bond:
W1,000)
10,000 point
Source: Korea Exchange. http:\\eng.krx.co.kr
iv. Price Determination in Individual Competitive Auction with Single Price (Simultaneous Offer Trading)
Under this system all the quotations, received in a certain span of time, are deemed to have been received at the same time, and the trading is made in single price which shall then be applied to initial price determination, or the same occurring after resumption of either the market or trading (applying quotations received 10 minutes since resumption).
(1) In the above case, the trade shall be executed between the matched quotations as follows:
(a) The total quantity of offers with the price lower than the matched price and the total quantity of bids with the price higher than the matched price.
(b) With regard to bids and offers at the matched price, the quantity are mentioned below:
(i) total quantity of either bid or offer quotations at the matched price; and (ii) among the quantities of quotations on the counter side, the quantity
above the trading unit of the issue concerned.
(2) Priority of simultaneous quotation is as follows (a) Price priority
(b) In case of same price range, the quotations for customer account transactions have priority over the quotations for proprietary account transactions (c) Quantity priority per quotation
(d) The order of quantity allocation (10 times of trading unit ➝ 100 times
➝ 1000 times ➝ half of the residual ➝ the total residual quantity)
v. Price Determination in Multiple Price Auction (Continuous Auction)
In case the lowest offer price matches the highest bid price among the competitive bids and offers, trading shall be made at the price of quotation received first, and trades between the matching bids and offers are executed according to the priority of quotations (priorities in price and time).
vi. Reported Trading System
When the members request the KRX to execute a trade between the bid and offer quotations of which the issue of debt security, price and quantity are the same, the KRX execute such trade at such price and quantity.
To input a report in the KRX’s system through the member’s system, the KRX executes the reported trading between corresponding quotations and at the same time it considers settlement is finished.
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vii. Settlement
Table 3.3 Description of Settlement Process
Item Descriptions
Kind of trading Applicable only to the same day settlement (T+0) trading Settlement between investors and securities company
Time limit of settlement By 3:30 p.m. of settlement date
In case of registered bond, registration notice or registration certificate shall replace the sold bonds, and required documents for the change of registration shall be attached.
Collection of commission for customer account trading
If trading is made through entrustment of selling or buying from an investor, a member company shall collect commission according to the rates reported to the Korea Exchange.
Settlement by a member
Time limit of settlement By 4:00 p.m. of settlement date
Settlement method A member has to make a payment to settlement agency prior to time limit after netting.
Settlement of foreign currency bond shall be made in Korean won conversed by basic rate on the settlement date according to Foreign Exchange Control Regulation
Settlement by Securities Delivery Bill
If it is impossible to deliver the traded bonds due to defective bonds, selling small-lot bond, foreigner’s selling or selling bonds with low liquidity, the securities delivery may be replaced by Securities Delivery Bill issued by the Korea Exchange.
Source: Korea Exchange. http:\\eng.krx.co.kr
b. Small-Lot Public Bond Trading System i. Small-Lot Bond Standard
Small-lot bond means the one issued in that month and in the previous month based on trading date with an amount of less than W50 million at face value per account (per person in case of common account).
ii. Applicable bonds
(1) Type-I National Housing Bonds
(2) Seoul Subway Debentures and Seoul regional development debentures
(3) Public bond for community development issued by special city, metropolitan cities and provinces according to the Regional Public Enterprise Act
(4) Provincial subway debentures (Busan, Daegu, Daejon, Kwangju, and Incheon) iii. Market Concentration Trading System of Small-Lot Bond
Market concentration trading system of small-lot bond was introduced for the purpose of improving convenience of buyers of the “add-on” fractional bonds and mitigating personal burden by raising easier exchange of bonds to be bought by persons at the time of registration of real-estate or automobile. Taking into consideration liquidity of bonds, eligible bonds in this system are the bonds having been issued in that month or in the preceding month, and the quotation of trading is less than W50 million per account (or per person in case of common account).
(1) Report of Small-Lot Bond Self-Trading
In spite of the above system, if trading price of small-lot bond is above market price or made after trading hours, it is possible to have self-trading, with limitation to the trading with settlement in that day, outside of market on the basis of reported market yield. In this case the member is liable to report to the KRX the trading hour, name of issue, quantity and price (yield).
(2) Exclusive Member for Buying Small-Lot Bond
In order to have smooth trading the KRX nominates, among member companies, exclusive members for buying small-lot bond who submit compulsory bids, which is being run with 20 firms as of March 2010.
(3) Reported Market Price System
Reported market yield means the one calculated by the KRX; arithmetic average price disregarding high price of 10% and low price of 20%. The KRX calculates the said ratio when an exclusive member company reports a desired price for the purchase to enhance easier exchange by persons who are to compulsorily purchase the “add-on”
fractional bonds and to promote consumption of bonds based on market fair price.
Reported market price is applied to trading at the time of market closing of the next day so that a person can dispose the public bonds they owned at this price.
iv. Trading Rules Applicable to Small-Lot Bond.
Table 3.4 shows the trading rules especially applicable to small-lot bond.
Table 3.4 Trading Rules for Small-Lot Bond
Item Descriptions
Common account for small-lot bond only
One-time trading for the “add-on” fractional bonds by an individual is possible through common account only for small-lot bond under the name of a member without opening a separate account.
Bid price per kind of bond Seoul subway debentures, Seoul regional development debentures, and provincial subway debentures shall be classified into categories per same issuance date, and their bid prices are submitted as one group
Trading unit Face value W 1,000
Priority of simultaneous quotation W10 million ➝ W50 million ➝ W300 million ➝ W500 million ➝ the residual
Trading at market closing Single price by reported market price of previous day shall be applied to trading from 20 minutes prior to closing till market closing
Source: Korea Exchange. http:\\eng.krx.co.kr
c. Primary Dealer Trading System i. Bonds Eligible for Trading
Government bonds are traded exclusively in the special market. Applicable bonds are Korea treasury bonds (KTBs), monetary stabilization bonds, and Korea Deposit Insurance Corporation (KDIC) bonds. The details of the bonds eligible for trading in the special market are shown in Table 3.5.
Table 3.5 Bonds Eligible for Trading in the Special Market
Item Details
Benchmark KTBs The most recently issued (on-the-run) KTBs in their respective maturity ranges. Primary dealers are required to perform market making for the benchmark KTBs.
Non-benchmark KTBs KTBs other than the benchmark issue (off-the-run issues)
Monetary stabilization bonds The most recent two MSB issues whose outstanding amounts are W200 billion or more (among 1-year and 2-year maturity of MSBs)
KDIC bond The most recent two 5-year KDIC bonds issues whose issuance amounts are W200 billion or more.
KTB = Korea Treasury bonds; MSB = monetary stabilization bonds; KDIC = Korea Deposit Insurance Corporation Source: Korea Exchange. http:\\eng.krx.co.kr
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ii. Trading Hours and Quotation Price (1) Trading Hours
Trading hours are from 9:00 a.m. to 3:00 p.m. for specialized market of government bonds. Holidays are public holidays, Labor Day, Saturday, 1 day at the end of the year, and other necessary days designated by the KRX.
(2) Quotation
Price-based limit quotation is used in this market. The quotation tick-size is W1;
quotation quantity unit is face value W10,000 and trading unit is W1 billion.
(3) Kinds of Quotation
Quotation is divided into market-making quote and trading quote. The former is further divided into a two-way market-making quote and one-way market-making quote. A two-way market-making quote is the one that a primary dealer or a preliminary primary dealer submits as buying and selling quote simultaneously while one-way market-making quote is the one that a bond dealer (general dealer) submits as selling or buying quote.
Trading quote means a one-way quote that a participant submits to trade with making quote. In case of customer account trading, only one-way market-making quote and trading quote are available
iii. Trading Execution and Settlement
The specialized market of government bonds adopts a full automatic trading system based on the Internet-order environment of the KRX Trading System (KTS) for government securities in accordance with the individual competitive trading principle of multiple prices (simultaneous quotation not available).
Multilateral netting settlement and collective settlement are applied thereto so that in spite of innumerable trading by participants, it is possible for the KRX to minimize quantities of settlement bonds and the needed money. At present, payment adopts the fund-transfer method through Bank of Korea (BOK)-Wire while settlement of government bonds adopts transfer method between deposit accounts at the Korea Securities Depository (KSD).
Settlement period is T+1 (or T+2 for trading on the preceding day of reserves day) and time limit is 4:00 p.m. of the settlement day.
(1) Trading Execution and Settlement (Summary) (a) Method of Trading Execution
(i) Full automatic trading method using Internet-order environment and individual competitive trading principle of multiple prices (simultaneous quotation not available) to be applied
(ii) Settlement method: Multilateral netting settlement and collective settlement
(iii) Payment: Fund transfer method through BOK-Wire
(iv) Settlement of government bonds: Transfer method between deposit accounts at KSD
(b) Settlement Period and Time Limit
(i) Settlement period: T+1 (or T+2 for trading on the preceding day of reserves day)
(ii) Time limit: 4:00 p.m. of the settlement day iv. Participants in Government Bonds Market
Participants in the government bonds market include:
(1) Government bond dealers such as (i) securities companies and (ii) banks which, have obtained the permit from the government and are the members of the KRX;
and
(2) Ordinary institutional investors, such as (i) pension funds, (ii) insurance companies, and (iii) asset management companies.
Depending on their functions, government bond dealers are categorized into primary dealer (“PD”) and the ordinary dealer (“dealer”).
PDs have rights to directly participate in the underwriting of KTBs in the primary market, but are required to act as market maker in the KTS of the KRX. Dealers are able to participate in the KTS of the KRX, but are not allowed to directly underwrite KTBs in the primary market. There are 20 PD companies as of the end of December 2010.
v. Primary Dealer System
Primary dealer is rendered benefit such as preferential bidding opportunity in the issuance market of government bonds, bidding on behalf of non-competition bidding participants, takeover of government bonds and financial support. Meanwhile, the PD is a market maker who takes over more than 5% of total government bonds issued and performs market-making duties in specialized market for government bonds.
A Preliminary Primary Dealers (PPD) shall be nominated as a PD 1 year after its appointment as PPD by the Minister of Strategy and Finance if the agency submits application for PD, and satisfies the following requirements (Table 3.6):
Table 3.6 Requirements for Appointment as PPD
Item Details
Financial soundness Securities firm: net capital ratio for business >= 350%
Bank, merchant bank: BIS net worth ratio >= 10.0%
Dealing manpower More than five persons with more than 3 years experience Research manpower More than three persons with more than 3 years experience Back-office manpower More than four persons with more than 1 year experience Business period of government
bonds dealing
More than 2 years from permission date for government bond dealer to the application date for PPD BIS = Bond Institutional Settlement; PPD = Preliminary Primary Dealer
Source: Korea Exchange. http:\\eng.krx.co.kr
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